MAJOR changes to the way subsidies are paid to farmers could cause "massive destabilisation" in the dairy industry, peers in the House of Lords have been told.

MAJOR changes to the way subsidies are paid to farmers could cause "massive destabilisation" in the dairy industry, peers in the House of Lords have been told.

Farming minister Lord Whitty conceded there were "deep structural problems" within the dairy sector, but insisted they were not linked to reform of the EU Common Agriculture Policy.

Earlier this year the Government announced that the historic system of basing payments on levels of production will be phased out by 2012. It will be replaced in England by a flat rate payment calculated on the size of each farm in hectares.

A "single farm payment" will replace the raft of subsidies and in an attempt to simplify bureaucracy.

The changes form part of CAP reform which emphasises the need to "decouple" subsidies paid to farmers on the level of production.

During debate on dairy farming and CAP reform last week, Tory Lord Plumb told peers he was retiring from dairy farming at the end of the month when his herd would be sold.

"It's five generations of dairymen that I follow, therefore it's a very sad moment for me that we find ourselves in this situation," he said.

"My son has made a quite obvious decision in the circumstances in which he finds himself."

Lord Plumb, a former president of the Royal Association of British Dairy Farmers, said dairy farming had been a "progressive industry" in recent years. But returns on the average commercial herd were totally inadequate to allow for a living and reinvestment.

Lord Plumb said, "Government has made it absolutely clear and the industry has generally accepted that the market place should be at the centre of decision-making."

But instead of an expected market price increase after this announcement, the reverse had occurred. Dairy and beef farmers feared they would lose out as a result of the single farm payment and that the higher production per hectare the more they would lose.

He warned, "This move therefore, as it stands at the moment, can lead to pretty massive destabilisation of the whole of the industry."

Between 2002 and 2003, imports of dairy products had risen by 25% in value, he added. More transparency was need about why domestic milk producers were receiving as little as 18p a litre.

Lib-Dem MP for Montgometyshire Lord Hooson said Europe had inherited a policy dreamt up "largely to keep communism at bay" which had brought "enormous benefits" to a number of countries. But it now needed completely fresh scrutiny to ensure that it was right for the conditions at the moment.

Conservative spokesman Lord Dixon-Smith said while the new system of subsidies might support farmers it would mean many of them would have to give up production.

He said, "He may well keep his farm pretty and beautiful but it could produce no milk. This will begin to happen over the next 10 years.

"Agriculture in my view is heading into a considerable depression at the present time. I am not optimistic for the future."

Lord Whitty agreed that the steps being introduced were "radical" but economists had predicted they would lead to a 35% increase in UK agricultural income.